Performance related pay:
is it the answer to improve
performance in the public sector?
Dr. Monica Franco-Santos
Senior Research Fellow, Centre for Business Performance, Cranfield School of Management
monica.franco@cranfield.ac.uk
Overview
 Background and trends
 Impact of Performance Related Pay
 A ‘new’ approach
Twenty years ago…
 Base pay (increments based on service)
 Promotions
In the late eighties and early nineties…
At present …
 Base pay (competencies, job roles, etc.)
 Promotions
 Performance Related Pay (PRP)
PRP definition
 Variable pay based on specific behaviours,
outputs or outcomes
 These behaviours, outputs or outcomes can
be individual, team or organisational based
Performance
measures
Variable pay
OECD PRP report (2005)
 66% of OECD countries have implemented
PRP or are in the process of doing so
 Gap between the existence of the so called
PRP scheme and its concrete functioning
 There is no single model of PRP across OECD
member countries
OECD PRP report (2005)
 However, common trends are:
 PRP policies have spread from management level
to cover many different categories of staff
 Increase in the use of group performance schemes
 Standardised PRP schemes have evolved into
more decentralised systems
 Increased diversity of the criteria against which
performance is assessed (outputs, competencies)
OECD PRP report (2005)
 Performance appraisals are less standardised,
formalised and detailed than ten years ago
 The use of performance targets within PRP are
more widespread
 The size of performance payments is a modest
percentage of the base salary:
– <10% ABS for employees
– 20% ABS for managers
OECD PRP report (2005)
UK Data… (CIPD, 2006)
Main reason for using PRP
To improve civil servant’s motivation
and accountability as a way to
improve overall government
performance
Impact
PRP is an attractive idea but its
implementation is complex and its
impact ambivalent
… and this is so in both private and public sectors
Impact
 Research suggest that:
 PRP is unlikely to motivate a substantial majority
of staff, irrespective of its design
 Job content and career development prospects
are the strongest incentives for public employees
 The success or failure of PRP is substantially
influenced by contextual factors
Impact: Why?
 Main PRP assumptions …
 Individual and team outputs contribute to
organisational performance
 Individuals are mainly motivated by money
 Managers can and will make fair assessments of
their subordinates
 Organisations can accurately measure individual,
team or organisation outputs
Impact: A paradox…
The paradox is that despite these
negative impact results, government
and public interest in PRP is still
increasing …
Reasons why…
 The overall principle behind PRP is strongly
supported by politicians, civil servants and
citizens.
“good performance should be rewarded”
 Transferability of private sector practices to
public sector settings
“It is typical for a government to follow private
sector examples and buy pokes without looking
inside to see if there’s really a good pig in there”
(Ingraham, 1993)
Benefits of PRP…
 PRP as a catalyst for other org. changes
 In those organisations in which there are:
– High levels of managerial discretion in HRM
– High levels of trust
– Common and shared values and objectives between
executives and employees
– Consensus about the measures of both individual and
organisational success
– Enough financial resources available
the processes that accompany PRP have made
organisational changes possible and positive
Benefits of PRP…
 Example of key transformations due to PRP…
 Effective appraisal and goal setting
 Clarification of tasks
 Acquisition of new skills
 Improved employee-manager dialogue
 More teamwork,
 Increased flexibility in work performance ….
CULTURAL CHANGE
Benefits of PRP…
“It appears that it is NOT through the
financial incentives it provides that PRP can
contribute to improving performance, but
rather through its secondary effects, that is
the changes to work and management
organisation needed to implement it.”
(OECD, 2005)
An ‘new’ approach…
Performance Related Rewards
Total Rewards
Extrinsic Rewards
Non-monetary
(Recognition)
Monetary
Direct
Compensation
Base Pay
Incentives
Intrinsic Rewards
(self-motivation)
Indirect Compensation
(Benefits)
Protection
programs
Employee
services
(American Compensation Association,1999)
Performance Related Rewards
Agency 1
• Intrinsic
• Extrinsic (base pay,
recognition)
Agency 2
• Intrinsic
• Extrinsic (skill base pay,
bonus based on outcome
measures a,b,c)
Conclusions
Performance related pay:
is just an answer to improve
performance in the public
sector
… it is NOT the holy grail
Final remarks…
 Ask what public organisations need, not
what private organisations do.
 Find examples of success and failure in the
public sector. Learn from them!
 Ask if threshold conditions for success are
going to be present for implementation.
 Mostly… enough funding
 Explore the fits of PRP with other initiatives
that are also taking place
 PRP is not a technical add-on.
Final remarks…
 Look carefully at other reward elements that
can promote good performance
 Recognition plans
 Intrinsic rewards
 Use previous research or execute new
research in which to base managerial
decisions regarding the design of PRP
 OECD (2005)
 Milkovich & Wigor (1991)
Future research needed!
 New PERFORMANCE RELATED REWARDS
(PRR) designs
 Understanding of how contextual factors
affect the impact of PRR
 Practical tools for implementation of PRR
practices
 Strategies that would lessen the number of
dysfunctional behaviours produced by PRP
Q&A
References

Christopher, H. and Hood, C. (2006), 'Gaming in Targetworld The
Targets Approach to Managing British Public Services.', Public
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
Durant, R.F., Kramer, R., Perry, J.L., Mesch, D. and Paarlberg, L.
(2006), 'Motivating Employees in a New Governance Era The
Performance Paradigm Revisited.', Public Administration Review, Vol.
66, No. 4, pp. 505-514.

OECD (2005), Performance Related Pay for Goverment Employees ,
OECD Press,

Milkovich, G. and Wigor, A. (1991) Pay for Performance Evaluating
Performance Appraisal and Merit Pay, National Academic Press,
Washington, DC.

Ingraham, P.W. (1993), 'Of Pigs in Pokes and Policy Diffusion Another
Look at Pay-for-Performance', Public Administration Review, Vol. 53,
No. 4, pp. 348-356.

Perry, J.L. and Petrakis, B.A. (1988), 'Can Pay for Performance
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
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32-35.